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Never invade your nest egg's principle

What America needs is a simple book spelling out the most productive decisions people need to make as they transition from work to retirement. I've been asked to write such a book, so I thought it would be good practice to see if I could confine the basic ideas to a single column. So, here goes:

Retirement accounts, savings, home equity and Social Security are the only assets and income sources to support a lifestyle for the duration of life.

Social Security is surprisingly robust, especially for couples who have had two incomes. From ages 62 until 66, it doesn't pay to take it if you plan to earn any income at all, because you lose 50 cents of Social Security for every dollar earned. However, from age 66 on, you can earn all you want and still collect the maximum benefit. Someone who starts at 66 can collect for four years and then return the money at age 70, which reconstructs the higher benefit they would have received by waiting until age 70. All future costs of living increases will then apply to a much higher monthly income. As fabulous as this deal is, only 246 retirees took advantage of it last year.

Approaching retirement, an informed person would have had approximately a third of their money in bonds, but no more than that, because this is the sweet spot offering the most downside protection while giving up less than 1 percent of the up-side.

In about the first seven years of retirement it creates a perfect storm to take income out of funds that are also losing money at the same time. A loss of principle with no hope of a "snap-back" can adversely affect all future years of retirement. Given a market downdraft, a retiree should not remove more than 4 percent per year (basically the dividend payout) from the stock portion of their assets. Most major "crashes" recover within a few years, so after recovery has taken place, a higher payout that includes both dividends and some of the capital gains can resume.

In retirement, a 50/50 mix of stock and bond mutual funds can generate what is normally about a 5 percent combined rate of return just from bond interest and dividends. The dividends of 4 percent on large value-oriented stock funds amount to 2 percent of the total retirement account. The 6 percent return on a combination of bond funds amounts to 3 percent of the total retirement account. The combination of both halves yields 5 percent overall. At this rate, none of the principle is being touched. "Never invade the principle" is the rallying cry of the truly well-off. It should also apply to anyone newly retired in reasonably good health with longevity in their genes.

Anyone who makes it to age 66 has a 50 percent chance of living to about age 87. Today, there are 75,000 Americans who are age 100 or older and one third of them still drive. Inflation can eat away the value of a retirement account, and this explains why half of the assets should be in stocks which will rise with inflation.

Anyone turning their retirement money into an income stream needs to have their IRA (Individual Retirement Account) housed at the Vanguard family of funds. Run as a giant cooperative, it is the only financial services firm that consistently offers investment services at fees about one-fifth of what competitors charge. When setting up accounts that will deposit interest and dividends directly into a checking account once a month, the wrong financial institution can quickly turn what should have been 5 percent into a net of 4 percent (a 20 percent reduction) because the fees now directly impact retirement income.

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